Booking the bonus
It’s that time of the year, when all the good businesses and bosses are wishing their employees a happy holiday season and, hopefully, topping off the next paycheck with a little cheer in the form of a bonus.
Payers and payees alike often have questions about the taxation of occasional bonuses – whether they are holiday gifts or performance-related, or just rewards for hard work in a busy season. Here are a few facts about how payroll taxes are calculated and paid on bonus paychecks.
1. All compensation that is paid to an employee is income to that employee – which means it is reportable as income on that employee’s W2. Whether it is wages, salary, fringe benefits, or an award or bonus – all such payments are considered paychecks, regardless of how the employer chooses to describe them. Payroll taxes are withheld, just like any paycheck.
2. Reimbursements for travel or other expenses paid to an employee are not reportable as income to an employee as long as there is accountability for the expenses – that is, if they were business expenses paid out of pocket by the employee and verification (receipts, logs, etc) has been provided to the employer. Make sure you have some documentation, but these are not paychecks and are not added to the W2.
3. If the employee is not required to account for the expenses (“unaccountable” plan, no receipts), then all such reimbursements are included on the employee’s W2, and they are taxable income.
4. Employers must include these forms of compensation (except reimbursements under an accountable plan) in payroll reporting and tax withholding calculations, so they should be included on all payroll reports, such as Form 941, just like any paycheck.
*Tip: Gross up your bonus check. Just because you have to withhold payroll taxes on that bonus doesn’t mean you can’t put the exact amount you want to into your employee’s hand (or bank account). It’s easy now with payroll software or a good spreadsheet, to calculate the gross pay that you would need to bonus an employee for them to receive a certain amount ($500 or $1,000) after the taxes are withheld. It’s not necessary, but it sure puts the bow on the gift rather nicely.
As always, communicate with your accountant or bookkeeper to make sure you’re rewarding your employees properly and booking that bonus correctly.